Junior Miners: The Party Is Just Beginning!

During the panic of 2008, miners in general – and junior miners in particular – were devastated by the Wall Street-engineered sell-off, with many losing more than 90% of their value. With these companies sitting at once-in-a-lifetime valuations, no one (outside of the hardcore commodities investors) wanted to touch these companies. [That’s not the situation any more!] Words: 1160

So says Jeff Nielson (www.bullionbullscanada.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited […] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Nielson goes on to say:

It is with the miners who have advanced into the production phase where most of the truly exciting investment opportunities exist, offering spectacular up-side growth potential, with limited down-side risks. Let me review how this investment opportunity was created.

Precious metals (PM) miners (and commodities producers, in general) are expected to leverage the gains in the underlying commodities which they produce. However, since 2007 (and for the juniors, back to 2006) these companies have grossly under-performed versus the price of bullion – irrespective of whether the price of gold (and/or silver) was rising or falling. Put another way, they have been getting steadily cheaper based on the underlying fundamentals.

Why Have PM Miners Underformed Gold?
The underperformance of PM miners has naturally caused a great deal or consternation in this sector, even amongst the most committed “gold bugs”. There are several potential explanations for this phenomenon.

a) There are more than a thousand mining companies in the precious metals sector which simply may be too many.This argument loses most of its persuasiveness, however, when the size of the sector is looked at collectively. The collective market-cap of the entire precious metals sector is actually less than that of Exxon Mobil (XOM). Clearly there are enough investor-dollars floating around to support a sector of this size.

b) The creation and growth of the infamous bullion-ETFs. The legitimacy of the larger “bullion-ETFs” (which are supposedly backed by the same bullion banks which are the largest “shorts” of gold and silver in history), however, is seriously open to question – with the question being: do they really hold any bullion?

Anyone suggesting that bullion-ETFs are completely legitimate faces the enormous hurdle of explaining how/why the largest “shorts” in the history of commodity markets would also be the sponsors/guarantors of what have become the largest investment vehicle (on the “long” side) for small investors in this sector.

Legitimate or not, bullion-ETFs have pulled tens of billions of investor dollars intended for precious metals [physical bullion and the shares of mining companies] into these paper-trading vehicles. Naturally a large chunk of that money would have gone into real bullion but, for whatever reason, many small investors are simply unwilling to hold “physical” gold and silver so, previously, all of these dollars would have gone into the shares of mining companies as the next-best proxy for holding physical bullion.

Absent these billions, mining companies have not been able to leverage the gains in bullion over the last few years. This has also removed what is historically seen as one of the most important, bullish technical indicators from this sector: the out-performance of the miners – very convenient, indeed, for the bullion-bank “shorts”.

Given the tendencies of bankers to back “winners”, suddenly the same mining companies which couldn’t get a penny one year ago are now being welcomed with open arms by Canadian bankers. It is with this set of parameters that we can now look to the future for these companies.

What is the Future for PM Miners?
a) With rising share prices (and equally impressive gains in trading volumes), many of these companies have very attractive charts – adding yet another source of demand: the speculative traders. While these are clearly the most fickle segment of the investment community; high trading-volumes, great volatility, and strong underlying fundamentals are a combination likely to maintain the interest of these buyers.

b) Just two years ago these companies were totally starved for capital, ignored by analysts, shunned by investors, and at their worst valuations of this decade-long bull market. It is typical of market psychology that such scenarios often form the basis for the strongest, bull-market runs.

c) Now these same miners are all fattened with new capital, sought-after by investors, and fawned-over by analysts. However, unlike the fantasy-rally in U.S. markets, where valuations are grossly excessive by any rational metrics, precious metals miners are objectively inexpensive – still under-valued versus the commodity they produce.

d) Some of the gold perma-bears have cited the fact the miners have not outperformed bullion as a reason to believe to that this sector is poised for a crash. Some have even resorted to the hysterics of calling the precious metals sector a “bubble”. Ignore these fear-mongers.

The price of gold remains at half of its all-time high when adjusted for inflation, while silver is at only a tiny fraction of its inflation-adjusted high. Meanwhile, the miners are valued cheaply versus current bullion prices. No honest and informed commentator could describe such parameters as a “bubble”.

The same banksters who undermine precious metals at every opportunity [however, are actually promoting] the precious metals sector with their refusal to curtail the excessive creation of new debt and the paper they call “money”. [As such,] the end of the precious metals bull-market remains out of sight – on even the most distant horizon.

Conclusion
The time to buy into precious metals miners is not when everyone living on your street holds shares in at least a couple of these companies. The time to buy is now: when valuations are cheap, few yet understand these companies, and the bull-market remains “young”.

in addition, as more and more questions are asked about the legitimacy of bullion-ETFs, this is yet another new source of demand for precious metals miners. Should these funds become completely discredited, or should one or more funds formally default on their obligations to unit-holders (both being possible scenarios) the flow of dollars away from the ETFs and into the miners will go from a trickle to a flood.

Those who remained loyal to this sector have already regained their losses from last year and begun making real gains again. The good news is that our “party” has just begun.

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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